What President Obama's Emissions Proposal Means for Natural Gas

Why the president’s emissions proposal could lead to much greater demand for natural gas over the next several years.

In a speech at Georgetown University late last month, President Obama outlined a detailed plan for tackling the pressing issue of climate change.

One of the main goals he discussed was reducing annual carbon pollution in half over the next two decades. To move closer to this goal, he plans to reduce greenhouse gas emissions from U.S. power plants by empowering the Environmental Protection Agency to establish carbon pollution standards for both new and existing power plants.

While the coal industry didn't take too kindly to his proposal, his words were surely well received by natural gas companies. Let's take a closer look at why the president's proposal could lead to a substantial increase in natural gas demand over the next several years.

Obama's proposal and future natural gas demand According to industry analysts, President Obama's plan to cut carbon emissions from U.S. power plants could mean an additional 4 billion to 8 billion cubic feet per day of natural gas demand growth over the next decade.

"Using the National Resources Defense Council's notional 1,500 [pounds of CO2 emissions per kilowatt hour] as a starting point implies an incremental retirement of about 70 GW of coal-fired capacity by 2020 over and above approximately 40 GW of expected retirements associated with the MATS rule," said ClearView Energy Partners' analyst Kevin Book in a note released after the speech.

The basic idea is that the president's proposal to limit carbon emissions will give power plants incentive to use more natural gas instead of coal. That's because coal and natural gas compete directly for market share in the U.S. power-generation market. Though this market has historically been dominated by coal, gas suddenly became a much more attractive alternative as its price plunged to a decade low last spring.

Other natural gas demand drivers In addition to demand from utilities, other key drivers of future demand for natural gas include industrial and petrochemical firms, LNG exports, and, to a lesser extent, residential and commercial conversion. Another wildcard source of demand may also come from the transport industry, where demand for natural gas-powered trucks has soared in recent years and is likely to increase further.

For instance, Waste Management(NYSE:WM) has amassed a fleet of around 2,000 trucks that are powered by compressed natural gas and plans to add more, while UPS(NYSE:UPS) recently announced plans to purchase 285 more gas-powered trucks next year.

Even some of the largest players in the railroad industry, including Berkshire Hathaway's Burlington Northern Santa Fe, Union Pacific, and Norfolk Southern, are carefully studying the costs and benefits of converting their freight trains' engines to burn natural gas instead of diesel. BNSF, for instance, is using units from General Electric(NYSE:GE) and Caterpillar(NYSE:CAT), the biggest manufactures of locomotives in the world, to determine whether it wants to convert some of its trains to run of a mix of natural gas and diesel.

In all, these trends paint a highly bullish picture for the future of natural gas demand. Over the next five to seven years, we may see up to 20 billion cubic feet per day of incremental demand, according to Enterprise Products Partners(NYSE:EPD), a leading midstream firm. As I have argued before, I believe that there's a good chance that gas demand could outpace supply in the future, which suggests to me that natural gas prices are likely to move much higher over the next three to five years.

Fool contributor Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway, Enterprise Products Partners, UPS, and Waste Management and owns shares of Berkshire Hathaway, General Electric, and Waste Management. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Author

Arjun is a value-oriented investor focusing primarily on the oil and gas sector, with an emphasis on E&Ps and integrated majors. He also occasionally writes about the US housing market and China’s economy.